Legal risks with land transfer revenues in PPPs

In recent years, the public-private partnership (PPP) model has been widely used in the fields of infrastructure and public services. The state has also been vigorously promoting a deepening connection between PPPs and capital markets. Project operators can raise funds from capital markets through a variety of means, such as the issuance of bonds and capital securitization, to ensure the funding needs throughout the ecological chain of PPP projects, from launch, construction and operation, to exit.

To promote the development of local PPP projects, local governments either introduce preferential policies or promise funding support. A prominent example is channeling land transfer revenues back to PPP projects, which mainly takes on three forms: first, using future land transfer revenues to support government investments in PPP project companies; second, using land transfer revenues as a source of repayment of debts owed to financing platform companies; and third, carrying out the “sharing of premiums” received from land transfers.

In the fourth quarter of 2016, the Ministry of Finance successively issued the Notice on Jointly Announcing the Third Batch of Public-Private Partnership Demonstration Projects and Accelerating the Construction of Demonstration Projects (No. 91), the Notice on Issuing (No. 92) and the Interim Measures for the Implementation of Monitoring of Local Government Debt by Financial Ombudsman Offices of the Ministry of Finance Throughout the Country. These clarified the budget management system for PPP projects and required competent authorities to incorporate government accountability for expenditures beyond the current year as agreed in PPP project contracts into medium-term fiscal plans, subject to approval by people’s governments at corresponding levels, and according to the budgeting procedures and requirements, incorporate revenues and expenditures for the next year specified in contracts that meet the requirements for budget management. Notice No. 91, meanwhile, stipulates that sources of funding for, and future profits from, PPPs and debt service obligations may not be linked to land transfer revenues.

The use of anticipated land transfer revenues as a source of funding for investment in the construction of PPPs may lead to project funding uncertainties, thus posing legal risks to project implementation.

Jiang Fengtao is the founding partner and Liu Bing is a partner at Hengdu Law Firm. Zhai Yiyang, an associate of the firm, co-authored the article